1. Understand capital gains tax
If you plan to sell investments, it’s essential to understand how capital gains taxes work. Long-term gains (on positions held over a year) are taxed at preferential rates, while short-term gains are taxed as ordinary income, often nearly twice as high. Before liquidating positions to raise cash or rebalance, review your cost basis and holding period. Thoughtful sequencing by prioritizing long-term holdings and tax-advantaged accounts can help minimize what you owe in April.
2. Consider tax-loss harvesting
As markets fluctuate, some positions inevitably trade below your purchase price. Selling losing investments may offset realized gains elsewhere and lower your overall tax liability. This is especially impactful in taxable accounts. Remember, you’re taxed only on net capital gains — so realizing losses strategically can help shield your portfolio’s growth from unnecessary taxation.
3. Give smarter
Cash is often the least tax-efficient way to give. Donating appreciated stocks or ETFs through Donor Advised Funds that you’ve held for over a year allows you to claim a deduction for their full fair market value and avoid capital gains tax on the donated amount. You can also choose when to make your charitable grants — contributing in high-income years for the deduction, while distributing to charities over time as you wish.
4. Maximize your employer retirement plan
For 2025, you can contribute up to $23,500 to an employer-sponsored 401(k), plus any employer match. Increasing contributions before December 31 can reduce your taxable income this year while accelerating your long-term compounding. If your plan allows after-tax contributions and in-plan Roth conversions, explore the “mega backdoor Roth” — one of the tax-efficient ways to build tax-free wealth inside your employer plan.
5. Consider a backdoor Roth IRA
High earners who exceed Roth IRA income limits can still gain access through a backdoor conversion. This involves contributing to a traditional IRA and then converting those funds to a Roth. Once converted, growth and qualified withdrawals are tax-free for life. Just be mindful of the pro-rata rule, which determines how much of your conversion is taxable if you hold other pre-tax IRA balances.
6. Review tax efficiency across accounts
In higher tax brackets, the difference between “where” you hold investments can be as important as “what” you hold. Treasury bills and municipal bonds provide tax-advantaged income, while broad index ETFs or individual stocks tend to be more tax-efficient than mutual funds. As a rule of thumb, hold tax-inefficient assets in pre-tax accounts such as IRAs or 401(k)s, and tax-efficient assets in taxable accounts (like brokerage accounts). The right structure can meaningfully improve your after-tax returns over time.
7. Make the most of an HSA
If you’re eligible, an HSA remains one of the most powerful savings vehicles available. Contributions are deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free — a rare triple benefit. Whenever possible, pay medical costs out of pocket and allow your HSA balance to compound. After age 65, you can also withdraw funds for non-medical expenses; those withdrawals are taxed as ordinary income, similar to a traditional IRA.
8. Fund a 529 plan
A 529 plan allows tax-free growth and withdrawals for qualified education expenses. Many states offer tax deductions or credits for contributions, creating an immediate incentive to fund these accounts. Even modest, recurring contributions can compound significantly over time. If your state plan offers low-cost, diversified investment options, consider setting one up before year-end.
9. Time taxable events strategically
Deferring a taxable transaction from December to January can postpone the tax bill by a full year. This can be useful when selling securities, taking bonuses, or realizing large gains. Timing matters — shifting income or gains into the next calendar year can give you up to sixteen additional months to plan, save, or reinvest before the tax comes due.
10. Review your risk management plan
An effective financial plan goes beyond investments. Before year-end, ensure your protection strategies are up to date:Review life and disability insurance coverage.Confirm adequate liability limits on home, auto, and umbrella policies.Update beneficiaries on all accounts and policies.Ensure your will or trust reflects your current wishes.Review powers of attorney, medical directives, and guardianship designations.
